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Tuesday 20.03.2018 | Name days: Made, Irbe

Expert: Latvian companies profitability approaches Western European level

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Last year, the average profitability of Latvian companies came close to the Western European countries’ level, characterized by moderate long-term profit but focusing less on venture activities with high yield, points out Jānis Hermanis, the financial analyst at Mortgage Bank.

According to the provisional companies performance, the expert concludes profit indicators achieved in 2010 are more moderate than the ones in the fat years. For example, last year the capital return formed around 5%, but in 2006 and 2007 – 17%.

According to Hermanis, in 2010 money circulation indicators dropped in Latvian enterprises, indicating faster settlements between businesses and more efficient use of resources.

Hermanis considers the economic crisis has urged the business sector to direct its activities towards sustainability, achieving better performance than last year with equivalent total turnover, thus gradually boosting the efficiency and operating with reasonable level of profit.

In his view, the year 2009 was the most difficult period for businesses, when businesses total net turnover fell 22%, compared to the previous year. The turnover decline occurred in all sectors of the economy, most of which operated with losses in 2009. In 2010, the total net turnover hovered around the previous year’s level, while profit indicators improved, the analyst informs.

However, he points out changes in financial indicators of various sectors differ due to the crisis the, and most of them can be classified into one of the three following groups.

The first group includes industries operating with profit in 2009 and 2010, despite dropping turnover. These are agriculture, forestry, logging and fishing sectors, whose performance was greatly boosted by the European Union support, subsidies or public procurement.

Similarly, relatively better profit indicators were recorded in mining industry, transit-related sectors, and in industries providing goods and services with traditionally more stable demand – food and beverage production, chemical production, energy, water supply, sewerage and waste management, professional, scientific and technical services, health and social care. Also the analyst counts in sectors with higher value added – pharmacy, computer, electronic and optical device manufacture, telecommunications, programming, IT services and education.

In the second group there are sectors operating with losses in 2009, but profit in 2010. This group comprises light industry, wood processing, paper and paper product manufacture, the majority of engineering sub-sectors, wholesale and retail trade, road and pipeline transport.

The situation has improved in most of these sectors due to increasing turnover, yet the sectors’ ability to improve operational efficiency also played a major role. This was achieved at the expense of enterprise restructure, streamlining operations, reducing costs, with weaker companies leaving the market, the expert explains.

Whereas, the third group comprises sectors operating with loses in the previous two years. These are sectors that previously focused on domestic market, but were unable to recover the demand: building material, furniture manufacture, construction, vehicle trade, real estate transactions, renting and leasing, arts, entertainment, recreation, sports. Losses were also reported in several export-related sectors, where demand was partly recovered in 2010: metal and metal products manufacture, accommodation and catering services.

Moreover, the third group also encompasses sectors weakened by the technological progress, change in society’s habits or international competition, for example, printing and reproduction of recorded media, radio, television and communication equipment and device manufacture, postal and courier activities, publishing, radio and TV broadcasting.

This division does not mean these sectors’ development will be the continuation of the above described scenarios. Companies operating with profit in the previous years may face difficulties and vice versa – the situation might improve also in sectors operating with long term loss, Hermanis says.

To his mind, future growth key factors will be the ability to plan long-term development, carefully assessing the EU support, subsidies and public procurements by adjusting the capacity to the  market demand and merging the existing resources in more competitive companies.

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